The average life expectancy for Americans has increased significantly over the last 120 years. For example, the average white man born in 1900 could expect to live for 47 years, and the average white woman for 49 years. By 2000, those numbers had jumped by 28 years and 31 years respectively. With longer life expectancies come challenges associated with providing income for a longer retirement. With the average Social Security check paying out just $1,461 per month in 2019, Americans need to be proactive in their long-term planning for retirement.
Basic Income Planning
Many working Americans can count on as many as three different sources of income in retirement. These include Social Security checks, an employer-funded 401(k) or pension plan, and any additional private retirement accounts (Traditional or Roth IRAs). When you look at those sources of income, you need to consider some basics that will help you plan proactively for what that money will be able to accomplish once you retire.
It's hard to plan for the long-term changes that will come through Social Security, but you can plan for inflation on a 20- to 25-year scale. For example, 20 years from now, the value of $100 won't be the same as it is today. Whether that's your weekly grocery budget or weekly entertainment budget, you need to understand how that could change in purchasing power. You can assume inflation will hit that purchasing power at around 3% per year.
For those with a pension, 401(k), and other retirement plans, you'll also want to plan for the event of early death. What happens to those funds if you die early? Will they pass on to your spouse to ensure they maintain a comfortable lifestyle?
Asset Allocation
As you begin to set aside your funds in private retirement accounts as a means of generating more income for your future retirement, you'll need to take the time to think about investing strategies and asset allocation. Those funds can be spread out across aggressive, moderate, and conservative risk categories to ensure steady, reliable growth. However, it's important to match your lifestyle expectancies with the reasonable returns your assets can deliver in the future. Make sure that your idea of moderate risks can deliver the type of returns that will support the lifestyle you wish to pursue.
Wealth Management
Finally, don't forget to effectively manage your wealth as you build up your retirement accounts with time. While your money may be spread across the stock market and less volatile areas such as bonds and mutual funds, you still need to be aware of how those income sources can impact your taxation. For example, it's important to understand the different impacts of traditional and Roth IRA accounts. Traditional IRA account withdrawals are taxed, while Roth IRA withdrawals are not taxed.
You never know what changes could come to tax laws in the years ahead. For example, 2017 saw tax laws lower the tax brackets in the US, and those stipulations are in place through 2025. What changes are made after that point are unknown. Make sure your wealth management plan insulates your income streams as much as possible from extreme swings.
The views expressed are not necessarily the opinion of Social Advisors, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.
This information is not a substitute for individual professional financial, tax, estate planning or legal advice. Individual circumstances vary. Please consult a financial professional prior to investing. Investing involves risks including the potential loss of principal. No strategy, such as asset allocation or
diversification, or product can assure success or protects against loss. Past performance is no guarantee of future results.
Bonds are subject to market risk, credit risk, inflation risk and interest rate risks and loss of principal. If sold
prior to maturity, investor may receive back less than originally invested. Bond values will decline as interest
rates rise and bonds are subject to availability and change in price. Investing in mutual funds involves risk, including the potential loss of principal invested. Risks vary depending upon the strategy used by the fund as well as the sectors in which the fund invests. When redeemed, shares may be worth more or less than the original amount invested.